AS 4510 Derivative Valuation and Risk Management Quiz 0, January 14, 2015

Circle the correct answer choice. Write a justification for your choice in the space provided. Ifyou run out of room, continue on the back of the page.

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1. Derivatives are written on the spot price of a market index. The current value is $900.

The annual risk-free rate of interest is 2.4% convertible monthly.

Jake writes a put option on the index with an exercise index price of $930. The price of the put option is $8.00.

After 3 months Jake’s put option is exercised at a price of $915.

Calculate Jake’s profit (or loss).

(A) $15.00 gain

(B) $15.00 loss

(C) $6.95 gain

(D) $6.95 loss

2. As with Chrysler Corporation many years ago, the government occasionally guarantees loans. What option is thegovernment granting and to whom when it guarantees a loan to Chrysler?

(A) The government is giving the lender a call option.

(B) The government is giving the lender a put option.

(C) The government is giving Chrysler a call option.

(D) The government is giving Chrysler a put option.

(E) The government is giving the lender an interest rate swap.

3. The price of a call option on the market index with an exercise price of 1050 is $9.30 when originally purchased.After 2 months the position is closed, and the index spot price is 1072.

If interest rates are 0.5% effective per month, what is the call option owner’s profit?

(A) $9.30

(B) $9.39

(C) $12.61

(D) $22.00

4. On January 1, 2014, Karen sold stock A short for 50 with a margin requirement of 80%.

On December 31, 2014, the stock paid a dividend of 2, and an interest amount of 4 was credited to her marginaccount.

On January 1, 2005, Karen covered the short sale at a price of 44.

Calculate Karen’s return on the transaction.

(A) 30%

(B) 20%

(C) 10%

(D) 0%

(E) −0.1%

AS 4510 Quiz 0, January 14, 2015 Page 2 of 2